which the earnings were received. Under the lease, these earnings were to be applied first to the operating expenses, insurance, and taxes, before they were applied to the coupons on the mortgage bonds. The payment of the latter was diversion of moneys appropriated to the taxes, and this diversion must be restored. These receivers must pay all balances of taxes for the periods stated which are lawfully due, and it is so ordered. NATIONAL BANK OF AUGUSTA et al. v. CAROLINA, K. & W. R. CO. (HUMBERT, Intervener). (Circuit Court, D. South Carolina. September 3, 1894.) RAILROADS-INSOLVENCY-ALLOWANCE OF PRESIDENT'S SALARY. Where a railroad goes into the hands of a receiver without funds, and the earnings under the receiver are barely enough to pay current operating expenses, arrears of salary of the president will not be paid in preference to the mortgage debt out of the proceeds of the road, the mortgage giving the debt secured a first lien. Action by the National Bank of Augusta, Ga., and others, against the Carolina, Knoxville & Western Railroad Company. Joseph B. Humbert intervenes, and asks for the allowance of a claim. Claim disallowed. Cothran, Wells, Ansel & Cothran, for petitioner. SIMONTON, Circuit Judge. This is an intervention of Joseph B. Humbert, Esq., late the president of the defendant company, seeking payment of arrears of salary due to him as president. The petition, confirmed by the testimony, shows long and valuable service by Mr. Humbert, prompted chiefly by a desire to promote a public enterprise for the public good. There can be no doubt that good service was rendered, and that the amount claimed is justly due; but as the railroad company went into the hands of the receiver utterly insolvent, possessing no funds whatever, and as the receiver has barely paid current operating expenses, the earnings being insufficient to pay him any compensation, the question we are to meet is, shall these arrears of salary of the president be paid out of the proceeds of sale prior to and in preference over the mortgage debt? By the terms of the mortgage, the bonds secured by which were floated during Mr. Humbert's presidency and under his action, a first lien before all other liens is secured to these bonds. This is the contract between the parties, and all courts are bound by its terms. In Fosdick v. Schall, 99 U. S. 235, the supreme court of the United States recognized the equity of a certain class of claims controlling the conscience of the mortgage creditor seeking the aid of a court of equity, and to this class priority was given over the mortgage debt. The theory of this equity is this: It is the interest as well of the public as of all parties interested in a railroad that it be kept a going concern. To do this, there must be a ready supply of labor and materials necessary to this end. If persons who give labor and materials were required in every instance to make careful examination into the condition of the company, so as to ascertain its solvent capacity for paying debts, all of its operations might be brought to a standstill. For this reason, persons dealing with a company are encouraged to do so, with the knowledge that the court will see that all such supplies of labor and material given, and not paid for within a reasonable period before the appointment of a receiver, will be provided for by the court. This period never is beyond six months. But, in exercising this equity, the court goes upon dangerous ground, and therefore proceeds cautiously, keeping rigidly within prescribed limits. No case can yet be found which extends the equity to the president of the insolvent company. He knows exactly its condition. He has full notice of the liens existing. He is not bound to furnish his services a day after his remuneration seems uncertain. He cannot be included among that class of employés who have no means of ascertaining whether a short credit to the company is safe or not. Fosdick v. Schall goes upon the idea that services for labor and material should be first paid, and, if anything else be paid from which the mortgagees derive any substantial benefit, this is a diversion. which they must supply. But, were there any diversion of this kind in this case, it was made by and under the direction of the president himself, and now he cannot complain. In the absence of all authority for its allowance, the claim must be disallowed; and it is so ordered. BOHL v. CARSON.1 (Circuit Court of Appeals, Sixth Circuit. May 28, 1894.) No. 126. 1. NOTE-CONSIDERATION EVIDENCE. On an issue as to whether a note for $8,000 executed by C. to his own order, indorsed by him in blank, and held by a bank, was for a consideration, or, as claimed by him, was an accommodation for the bank, C. testified that having money in the bank, drawing no interest, A., the cashier, said "I" or "we" (by which C. said he understood reference was made to the bank) "can use" it, and that a loan of $8,000 was made accordingly; that, on his asking repayment, A. told him to draw on the bank, which he did June 26th; that, three days later, A. asked him to execute an accommodation note of $8,000 for the bank, antedated June 26th, which he did, the note in question being the last of the renewals of it. It was not claimed, however, that he thought the bank was using his name to borrow money. A., who was discredited as a witness by reason of misappropriation of the bank's money, testified that C. made his loan expressly to him and S., partners in a coal-land speculation, and that when C. demanded repayment he said he had not the money, but could procure it for C. from the bank on C.'s note, he agreeing that he and S. would take care of it, and pay the interest on it, and that accordingly, on June 26th, C. executed the note for $8,000, and A., as cashier, discounted it, and placed the proceeds to the account of C. A. used in the coal-land speculation the $8,000 loaned by C., and at the same time exe 1 Rehearing denied. cuted the note of himself and S. to C.. and placed it in an envelope in the bank vault, where C. kept his private papers. A. testified that C. knew of it at the time. C. denied any knowledge of it till two years later. C. knew of the speculation of A. and S., and S. testified that, a few days after the loan, C. asked him how it was coming on, and remarked to him that they were using $8,000 of his, C.'s, money in the enterprise. C.'s pass book showed a charge to his account at that time, "Note $8,000." C. produced the bank's vouchers for every other charge against him, covering a period of several years, except this one. Where the word "note" was used in other charges, the voucher was a check drawn as a loan on a note. Not only did C.'s pass book show a discount by the bank of his note for $8,000 on June 26th, but the bank's books showed such an entry between entries of the same date made by clerks whose integrity was not questioned. A. also placed in C.'s private envelope in the bank, as collateral security for the note of himself and S., notes secured by mortgage on the coal land. C. denied knowledge of their existence. C. was slipshod in business, his pass book lay at the bank nearly all the time, and it was claimed that he was a child in A.'s hands. Held, that the evidence sustained the statement of A., and showed that the note was for a consideration. 2. BANKS-SPECIAL DEPOSIT-FAILURE TO PROTEST. Where a cashier of a bank places his indorsed note in the private envelope of a depositor, in the vault of the bank, as collateral security for his individual note to the depositor, the bank is not liable for release of the indorser by failure to present the note for payment, and to notify the indorser of nonpayment; the note being merely a special deposit with the bank, and constructively in the depositor's possession. 3. SAME ESTOPPEL-OPINION OF OFFICERS. The fact that the officers of a bank whose cashier had recently absconded, believing the statement of one whose note it held that it was merely a note given at the cashier's request for the accommodation of the bank, expressed an opinion to C. that the note was without consideration, will not estop the bank from showing that there was a consideration, and enforcing the note. 4. SAME-USE OF COLLATERAL. Nor is the bank estopped from enforcing the note by reason of the fact that on the statement of C. that the note was without consideration, and that he had no interest in a mortgage in his private envelope in the bank's vault, executed by the cashier, and purporting to be collateral security to a note of the cashier to C., the bank assumed ownership over it, though, on its being shown that it was C.'s property, he is entitled to a credit for the amount realized by the bank from it. 5. SAME-CREDITS. Where a bank cashier sent money of his to C., to be applied on his note to C., and C., claiming that neither the cashier owed him, nor he the bank, turned the money over to the bank, he should, on its being shown that he owed the bank and the cashier owed him, be allowed credit on his debt to the bank for the amount, with interest from its receipt by the bank. Appeal from District Court for the Southern District of Ohio. Action by Henry Bohl, agent of the Second National Bank of Xenia, Ohio, against James Carson, on a note. Decree for defendant. Plaintiff appeals. Reversed. Henry Bohl, as receiver of the Second National Bank of Xenia, Ohio, brought an action against James Carson on a promissory note dated March 17, 1884, for $8,000, payable four months after date, made by Carson to his own order, and indorsed by him in blank. Pending the action the debts of the bank were paid. Bohl was discharged as receiver, and was duly appointed by the stockholders of the bank as agert, in pursuance of the national banking act, and the action was proceeded with in the name of Henry Bohl, as agent. Carson filed an ancillary bill on the equity side of the district court, seeking to enjoin Bohl from further proceeding in his action at law, on the ground that he had an equitable defense to the note, which could not be set. up in an action at law. The defenses which he set up in the bill to the note were: First, that the note was given to the bank as a mere accommodation to the bank, and not for any consideration; second, that, even if there was a consideration for the note, the bank had had in its possession, as collateral for its payment, notes for $13,000, with a solvent indorser, whom it had released from liability through negligence in presentment, protest, and notice; and, third, that the bank and its successors in title were estopped by matter in pais from seeking to hold the plaintiff, in any way, liable on the note. The district court found the equities with Carson, and entered a decree perpetually enjoining Bohl, as agent of the bank, from further prosecution of his action at law on the note. This is an appeal by Bohl from that decree. John S. Ankeney was in 1882, and had been since 1864, cashier and chief executive officer of the Second National Bank of Xenia. In 1880 he and one W. M. Smart, partners as Smart & Ankeney, purchased a tract of coal land in Hocking county, Ohio, for about $16,000. Neither partner had any capital, but Ankeney assumed the task of raising it. He secured enough for the first payment of $8,000, by indorsing the firm note with his signature as cashier of his bank, and, on the faith of the credit of his bank, procured its discount by the Farmers' & Traders' Bank at Jamestown, Ohio. The second payment came due in January, 1882, and he obtained the money for it from J. H. Cooper, county treasurer. Whether this was on his own credit, or on that of the bank, is disputed. Cooper called for repayment in February, 1882, and Ankeney was obliged to secure the money elsewhere. Carson, the complainant and appellee, had long been a depositor at the Second National Bank, and intimate with its officers. Much to his disappointment, the maker of a note held by him for $8,500 had paid it to the bank. This increased his deposit account early in February, 1882, to about $11,000. He complained to Ankeney that the payment of the note prevented its earning the interest he had expected. Ankeney said that he or they could use the money for a few days. Carson replied that this would be satisfactory, if he could have the money when he wished it, because he expected to use the money, later on, to purchase a business. A loan was accordingly made. Carson says that he understood Ankeney, in this conversation, to be speaking for the bank, as its cashier, and that he lent the money, not to Ankeney, but to the bank. Ankeney swears that the loan was made expressly to himself and Smart, to assist them in their coal-land speculation, and that he offered to Carson, as security for the loan, some coal-land securities to be thereafter given him, which offer Carson accepted. Carson says he knew that Smart & Ankeney were engaged in a coal-land speculation, and admits that Ankeney said something about coal-land securities as collateral to the loan, which he declined, because he was entirely content with the obligation of the bank. He says he supposed that the bank was helping Smart & Ankeney in the coal-land investment. Ankeney used $8,000 of Carson's deposit to repay Cooper. It is admitted that at the time Ankeney used this $8,000 he executed a note of Smart & Ankeney for that amount, payable to himself, and by him indorsed to the order of James Carson, and placed this note in an envelope in the vault of the bank, where Carson kept his private papers. Carson denies that he had any knowledge of the existence of this note until two years. or more later, after Ankeney had resigned as cashier and had gone west. Ankeney says that Carson did know of the note when it was executed. Smart (Ankeney's partner), who was called as a witness for Carson, says that this note was always referred to by himself and Ankeney as the "Carson note." He also says that Carson met him on the street shortly after its execution, and asked him how the Smart & Ankeney coal-land investment was getting on, remarking that they were using $8,000 of his money in the enterprise. This Carson does not deny. Carson was a slipshod business man, and left everything with Ankeney and the bank. His bank pass book lay at the bank almost all the time. The entries in it, covering the period from 1882 to 1884, are nearly all of them in Ankeney's handwriting. At the date of February 6, 1882, appears this debit to Carson's account, "Note $8,000.00." Carson produces all the bank's vouchers for charges against him in the pass book, except the one corresponding with this entry. For a similar entry of January 6, 1882, as follows: "Jan. 6. Note T. P. T. $1,060.00."--the voucher proves to be a check of Carson to the order of Townsley, the president of the bank, as a loan on Townsley's note. In June, 1882, Carson wished a return of the $8,000 lent by him in the previous February. He says that he applied to Ankeney for it, and Ankeney told him that all he had to do was to draw his check on the bank for the amount. Accordingly, on June 26th, he did draw his check for $10,000, and it was paid. Ankeney's statement is that Carson applied to him for a repayment of the loan of $8,000, and was told by him that he did not have the money; that, upon Carson's pressing him, he said he could procure the money from the bank for Carson by discounting the latter's note for that amount; that Carson thereupon, on June 26th, made a note for $8,000, payable to himself, and indorsed in blank, which Ankeney, as cashier, discounted, placing the proceeds to Carson's credit on the books of the bank; that he told Carson that he and Smart would take care of the note, and pay the interest on it. Carson's statement is that, some three days after he had drawn his check of June 26th, Aeney asked him, as an accommodation to the bank, to give his note for $8,000, and date it back to June 26th, which he did; that from time to time he gave renewals of this note to the bank, at Ankeney's request, without any consideration, the last being the note in suit; that when the note in suit fell due, in July, 1884, he declined to renew it further, although Ankeney offered him $1,800 in cash to do so. The books of the bank and Carson's pass book contain entries dated June 26, 1882, showing a discount by the bank of Carson's note for $8,000, and the payment of $10,000 on his check. The entry of the discount of Carson's note first appears on the daily blotter of June 26, 1882, in Ankeney's handwriting. The entry is preceded and followed by other entries of the same date, in the handwriting of clerks of the bank, whose integrity is not questioned. The entry was transferred to the journal for that date, at the end of the day's business, by one of these same clerks. In July, Carson's note fell due, and it was renewed, Smart & Ankeney paying the interest. On July 31, 1882, Smart & Ankeney executed a mortgage on their coal lands to Samuel W. Smart, a brother of W. M. Smart, Ankeney's partner, to secure notes aggregating $18,000 in amount, payable to Samuel W. Smart in two years from date. One of these notes, for $5,000, indorsed in blank by Samuel W. Smart, was given to one King, to whom Smart & Ankeney were indebted in that sum. The remaining notes, for $13,000 in all, were similarly indorsed, and were placed by Ankeney in Carson's private envelope in the bank, in pursuance, as Ankeney says, of his promise to Carson to give coal-land securities as collateral for the Smart & Ankeney note for $8,000 executed February 6th. Carson denies any knowledge of these notes, and repudiates ownership of them. They remained in Carson's envelope in the bank until they fell due, early in August, 1884. They were not presented for payment or protested, so that Samuel W. Smart, the indorser, was released from liability, if, indeed, he could otherwise have been held. In July, 1884, Smart & Ankeney's coal property ceased to produce coal, and they abandoned their enterprise, selling their equipment and plant. From this, after the payment of certain debts, they realized about $1,800. Ankeney's misuse of the funds and credit of the bank becoming suspected, his resignation followed, and he left Xenia for the west. After his departure the affairs of the bank were found to be in bad condition. His use of the credit of the bank to borrow $8,000 from the Jamestown bank was discovered, and other irregularities. Before Ankeney left Xenia, he took the $1,800 left from the proceeds of the coal equipment and plant to his partner, W. M. Smart, and, as he says, told Smart to take it to Carson, to apply on Carson's note to the bank. Smart says Ankeney told him to take the money to Carson, to be used in case the bank ever troubled Carson on his note. When Smart took the money to Carson, Carson said it was not his, and that he would not take it; that his $8,000 note held by the bank was mere accommodation, without consideration; and that he would have nothing to do with Smart & Ankeney's property. The $1,800 was accordingly turned over to the bank by Carson, who at the time emphatically disclaimed any interest in the Smart & Ankeney note, which was indorsed to his order, and was found in his bank envelope. Carson had several interviews with the president and the new cashier of the bank at the office of an attorney, |